Trade Negotiations Insights • Volume 9 • Number 2 • February 2010

Aid for Trade - an opportunity for re-thinking aid for economic growth

by Michael Brüntrup and Petra Voionmaa

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Aid for Trade (AfT) is a relatively new concept encompassing a number of activities supporting the ability of developing countries to engage in trade. While these activities have been carried out individually by donors for decades, the new elements brought in by the AfT initiative are bundling them under a common roof and embedding them within the institutional and political spheres of both development and trade policy.

However, the underlying paradigms of AfT, the complexity of the concept, the political and institutional issues involved and the specificity compared to traditional development assistance create challenges for implementation. This article sketches out opportunities and major difficulties for putting AfT into development practice and elaborates on possible implications for more traditional aid for growth.

The added value of AfT for development

AfT adds a valuable perspective to the debates on (assistance to) policies for economic growth. The emphasis on exports brings an indispensable quest for competitiveness and efficiency which conventional industrial, agricultural and other economic policy concepts often do not follow with the same rigour. And by combining trade and economic sector policies, export-oriented assistance and development-friendly trade agreements, AfT creates synergies for exports from developing countries. Moreover, the AfT agenda places a spotlight on the potentials of regional integration to act as a stepping stone for full international integration, while also creating opportunities to access untapped regional markets, especially during international turbulences (i.e. food crisis, financial and economic crisis). The European AfT agenda has adopted a particularly strong regional dimension against the background of the regionally-negotiated Economic Partnership Agreements (EPAs).

In times of global economic crisis, when protectionism is lurking around every corner, threatening especially weaker trade partners, a comprehensive AfT agenda is particularly valuable. It can raise attention to the dangers of protectionism for developing countries, and provide ready-made entry points for assisting them in maintaining their export capacities, such as through defending market access and overcoming shortages of trade finance.

Challenges of implementing the AfT agenda

Probably the biggest deception for developing countries has been the decision to account additional AfT as Official Development Assistance (ODA). Many developing countries had seen AfT as a compensation for losses occurring when opening up trade (which they regard as particularly favourable to developed countries). Hence, they had interpreted the “additionality” of AfT as additional to existing donor commitments (in particular to the politically declared - but legally non-binding - target to devote 0.7% of their GDP to ODA).

Similarly, initial uncertainties and manifold changes in the accounting rules of donor countries led to doubts about the additionality of AfT. In fact, overall AfT flows have increased by more than 10% per year since 2005, amounting to more than US$ 25 billion in 2007. In several cases, however, donors have achieved their pledges simply by applying the modified WTO-OECD monitoring rules, without initiating any new projects. This creates the impression that the AfT agenda has resulted in a re-labelling exercise by donors, rather than in genuine fresh aid.

For trade and AfT to be effective, they must be comprehensively and firmly incorporated into the growth and poverty alleviation strategies of developing countries, as well as into relevant sector-specific programmes. In addition, recipient countries must have the capacity to organise the contributions of donors around their national policies. Yet these conditions are often not fulfilled, particularly in poorer countries. Three interlinked factors challenge the formulation and implementation of the aid effectiveness agenda in AfT and in aid to economic sectors more generally: i) the cross-sector complexity of the measures to be taken, ii) the leading role of the private sector with often conflicting interests, and iii) the often limited degree of government dominance in the planning and implementation of productive sectors policies.

Even if comprehensive national programmes exist, no single donor can cater to all of the AfT needs of partner countries (not to mention regions) alone. This must be achieved by a number of donors acting in a coherent way with a high degree of coordination. Traditionally, economic sectors are coordinated (at best) in separate sector-specific donor coordination groups, such as transport, private sector development, and agriculture. Better harmonisation and coordination among these is required to fulfil the AfT agenda.

These problems have led to a certain deception and reduced credibility of the AfT agenda as well as to obstacles and delays in implementation. To renew the impetus, developing countries and donors alike need to re-think and foster their aid for growth by systematically incorporating aspects related to trade and, hence, the ever-increasing interconnectivity of the world economy.

The Case of German Aid for Trade

Germany is a major provider of AfT compared with other donors, ranking third behind Japan and the US and first among EU member states between 2001 and 2006. In 2007, German AfT amounted to approximately €1.2 billion.

Trade-related Assistance (TRA) makes up about 20% of total German AfT (1% trade policy and regulation, 19% trade development). Building productive capacities constitutes 45%, trade-related infrastructure another 35%. With an average TRA of €210 million between 2005 and 2007, Germany has more or less reached its basic self-defined goal of €220 million TRA as a contribution to the EU pledge. However, the level of engagement in TRA fluctuated considerably during that period. This lack of stability can partly be explained by a change in reporting practices applied by one German organisation (DEG). Partly it is also due to the fact that TRA has rather occurred as a by-product of general development programming without being systematically taken into consideration.

The regional focus of German AfT and TRA lies in Asia. German AfT for sub-Saharan Africa appears low (AfT: 16%; TRA: 19%), particularly when compared with the share of this region in overall German ODA (30%).

When looking behind these numbers and into a sample of policy documents, it appears that German development cooperation has regularly taken up trade issues in its private sector and agricultural development programmes. However, this is generally done without a consistent strategic approach with regard to transforming access to regional and international markets into real business opportunities.

Positive features of German AfT in case studies were said to be proximity to local institutions, long-term engagement, technical expertise, a wide array of instruments, and trust. On the negative side, the different aspects of trade-related needs are too rarely tackled through comprehensive German programmes in which the different instruments and implementation agencies are combined. Policy advice is not generally considered the strength of the German development partners. Regional linkages are judged to be weak. Finally, poverty issues are not sufficiently conceptualised and tracked in impact monitoring.

There are valid arguments that donors in general and the EU in particular should strengthen their support for AfT. Especially in the context of EPAs, more European AfT will become necessary. Compared to other EU donors, Germany has good reasons to take over a disproportionally large engagement: German aid has a wealth of AfT-relevant priority areas, instruments, agencies, experiences and a reputation for implementing AfT. As an important sign of its political will to stabilise and mainstream AfT, the German Federal Ministry for Economic Cooperation and Development (BMZ) has introduced an internal target line (”Zielgröße“) of €140 million per year for TRA. However, what is not yet visible is a close coordination of German AfT within the EU framework.

Conclusions

The comprehensiveness of the AfT agenda, the institutional link to the WTO and the self-interest of donor countries to fulfil the AfT promises in this context could lead to a boost of support to economic topics in development assistance. Indeed, the increased attention to trade and economic sectors in partner countries’ national strategies and in development assistance can be partially attributed to the AfT agenda.

AfT fosters and cements an outward economic orientation of developing countries for both exports and - in the longer run - imports. By increasing the utility of trade opportunities, it enhances their integration into the world market. This is widely accepted as the main path towards development, based on economic theory and practical lessons from successful emerging economies. At the same time, integrating developing countries into global markets is in the more “selfish” interest of the Western world as (future) trading partners and as drivers of the global trade policy agenda. Drawing a clear line between the two motivations is impossible and makes AfT prone to misuse.

Another risk of AfT is that it tends to underestimate the potential of domestic markets. For instance, the rapidly growing population and urbanisation in many African countries creates great opportunities for domestic farmers and food industries.

The AfT agenda also adds to the increasing number of “vertical” initiatives, such as the fund for HIV/AIDS or infrastructure. This leads to a segmentation of development cooperation, while efforts instead should seek to make aid more flexible by aligning it to developing countries’ priorities without earmarking it in advance for certain thematic issues.

For all these reasons, a very careful, transparent and participatory use of the AfT initiative is indispensable. However, trade and AfT are not ends in themselves, but means to achieve the ultimate goal of reducing poverty. Hence, AfT must be embedded in overarching national growth and poverty strategies which balance inward and outward orientation of national economies and ultimately aim to generate resources for social development and poverty reduction.

Authors: Dr. Michael Brüntrup is a senior researcher at the German Development Institute (Deutsches Institut für Entwicklungspolitik, DIE), Department for Competitiveness and Social Development. Petra Voionmaa, a Ph.D. student at the University of Helsinki, worked as a researcher for the DIE until June 2009.

This article is based on findings from a research project commissioned by the German Federal Ministry for Economic Cooperation and Development. The whole report (”German Aid for Trade, past experience, lessons learnt, and the way forward, Bonn: DIE studies 52″) can be downloaded under http://www.die-gdi.de/CMS-Homepage/openwebcms3.nsf/(ynDK_contentByKey)/ANES-7ZLE3W?Open&nav=expand:Publikationen;active:PublikationenANES-7ZLE3W.

Germany assumes that its basic contribution to the EU’s commitment to increase its TRA to € 2 billion per year by 2010 should equal its share in the EU budget and in the 9th European Development Fund (both approx. 22%), resulting in a provisional target of €220 million per year from 2010 onwards.

TRA increased from €163 million in 2005 to €243 million in 2006 before again falling to €224 million in 2007.